The Economics Of Allowing Aereo Television on Internet

by Staff

I don't know who has been following this issue, but it could affect everyone eventually. As web designers, we need to keep an eye on such issues and try to push society toward the logical resolutions. Robin Flynn sent in this article and it brings up to date with what's going on concerning AEREO. . .

Aereo is a technology company based in New York City that allows subscribers to view live as well as time-shifted streams of over-the-air television on Internet-connected devices.[1] The service launched in February 2012[2] and is backed by Barry Diller's IAC.[3] Immediately following Aereo's launch in New York City the company was sued by a consortium of major broadcasters, including CBS, NBCUniversal, Disney's ABC and Newscorp's Fox for copyright infringement. On April 1, 2013, A federal appeals court upheld a lower court's ruling, finding that Aereo’s streams to subscribers were not "public performances", and thus did not constitute copyright infringement.

News Corp. President and COO Chase Carey set off a firestorm of controversy and media attention April 8 when he suggested that if Aereo ultimately prevailed in court and continued in its present form, the FOX broadcast network could convert to a cable network. Given the billions of dollars of retransmission revenues at stake for both TV stations and broadcast networks, it is not hard to understand why FOX -- and subsequently Univision Communications Inc.'s Univision and CBS Corp.'s CBS -- would publically endorse this possibility.

Aereo is a threat to the broadcast dual revenue stream model because it provides broadcast programming and DVR services to subscribers via online delivery for a fee without compensating broadcasters for that content. Broadcasters believe that amounts to piracy of the broadcast signal. Through retransmission consent agreements (see here for an SNL Kagan whitepaper with background on retran consent) multichannel operators pay broadcasters for that signal in the form of retrans fees. Those fees have become an important part of the overall broadcast ecosystem.

It has been estimated that in the 2012-2016 time period TV stations will be paid over $18.2 billion in retrans revenues, of which the top five broadcast network owners could then be allocated over $9.2 billion. During that same period, we have estimated that TV stations would generate over $106 billion and broadcast networks could take in $91.8 billion in advertising revenue, making retrans revenue an important component of revenue but by no means the largest. By 2016, retrans revenues are projected to account for 21% of TV station ad revenues and 14% of TV network ad revenues.

As a point of comparison, while we project that this year retrans fees paid to TV stations will rise to $3.02 billion, we also project that multichannel operators will pay cable networks, regional sports networks and premium networks $44.5 billion in affiliate fees. FOX, which has long said that it is woefully underpaid in terms of its retrans fees per sub versus cable networks, is no doubt factoring in hope that it can raise its near-term retrans fee per sub per month for its O&O stations from the estimated $1-$2 level closer to the $5.54 that we project ESPN will generate this year.

FOX has always pointed to its network's far higher ratings as justification to ask for a higher retrans fee for its stations. In 2011, ESPN's prime-time rating averaged 1.84, versus 5.11 for FOX (that's the average percent of the universe of households viewing a network in prime time during the average minute, according to Nielsen Media Research).

Special thanks to Robin Flynn for her contribution here. Robin is with SNL Financial : the premier provider of breaking news, financial data and expert analysis on business sectors critical to the global economy: Banking, Insurance, Financial Services, Real Estate, Energy and Media & Communications.

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